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March 2016 - City level house prices at highest quarterly growth for 12 years

On 22 April, 2016

City house price growth in 2016Q1 was 4.2%, the highest for 12 years as the seasonal upturn in demand was boosted by investors rushing to beat the stamp duty deadline.

Tougher lending criteria and tax changes are likely to push investors into higher yielding, lower priced markets. Liverpool recorded the fastest increase in 2016Q1 as prices rise off a low base.

City level house price growth is expected to moderate in 2016Q2 with a market slowdown in higher value, lower yielding cities over the remainder of 2016.

The latest Hometrack UK Cities House Price Index reveals that city level house price inflation over the first three months of 2016 reached 4.2%, the highest rate of quarterly growth for 12 years as the normal seasonal increase in demand was boosted by demand from investors ahead of changes to stamp duty.

Table 1- UK 20 city index summary, March 2016

Source: Hometrack House Price Indices

Highest quarterly growth for 12 years

City level house price inflation over the first three months of 2016 reached 4.2%, the highest rate of quarterly growth for 12 years as the normal seasonal increase in demand was boosted by demand from investors ahead of changes to stamp duty. The year on growth for the 20 city house price index is running at 10.8%, ahead of 8.7% across the UK.

In the recent past, periods of accelerating house price growth have coincided with changes in market sentiment and demand – such as the introduction of Help to Buy in 2013 and after the 2015 General Election (fig. 1).

City Level Summary, March 2016Source: Hometrack House Price Indices

Liverpool records fastest growth in 2016Q1

The highest increase in house prices in the last quarter was recorded in Liverpool as prices rise off a low base, closing the gap to other major cities such as Manchester and Leeds where house price growth is running at over 7% per annum - the highest year on year growth since 2007.

Fig. 2 – Index of house prices from 2007Source: Hometrack House Price Indices

Investors ‘searching for yield’

The acceleration in growth in the last quarter has, in part, been down to stronger demand from investors, especially those searching for higher yielding property. Tougher lending criteria for buy to let investors and changes to tax relief on mortgage interest payments are likely to push investors to search for higher yielding property which means more focus of investor demand in lower value cities, with lower buying costs, and further support for house price growth.

Fig. 3 – Gross yields by city (2016Q1)Source: Hometrack Dashboard

Focus on EU vote after stamp duty rush

With the rush to beat the stamp duty deadline now over, the question is how weaker investor demand will impact house price inflation in the second quarter of 2016. This at a time when home buyers start to consider the implications of the EU referendum for the economy and mortgage rates.

We believe house prices will continue to rise but a moderation in investor demand and greater caution in the run up to the EU vote will limit further acceleration in house prices. We expect the rate of house price growth to slow more rapidly in high value, low yielding cities such as London where house prices will be more responsive to weaker investor demand.

March 2016 - City level house prices at highest quarterly growth for 12 years

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